Regulation, "Good & Bad"

How do we tell what is helpful from hurtful economic regulation? The evidence put forth in "The Bumbling Colossus" (TBC at 181-223) from legions of studies over the last decades by top (mainly Nobel-winning) economists demonstrates that intrusive regulatory efforts have caused more harm ( in costlier, less satisfactory products or services) than good. So what regulation is actually helpful? What sorts should we avoid at all costs?

As the book makes clear, the driving forces of economic progress are competition, productivity, and the right "rules of the game". Critical is recognition of the difference between on the one hand the wealth-generation which free markets (those without intrusive regulation) allow, and on the other the profits and "rents" (to use the economist's term) which privileged people and institutions garner from the protected position afforded them by government regulation. This privileged position arises from government mandates or rules which, intended or not, limit entry into a market, competition in the market, and restrict the choice of service or product consumers are allowed.

This can be called the difference between "market wealth" and "regulatory privilege". It may be explained this way:

Market Wealth and Regulatory Privilege Differentiated

Government taxation, regulation and control are imposed; those subject must pay or follow the rules. Political action is very hard to effect, and much harder still to undo. By contrast, open market transactions are voluntary and readily changeable, and the wealth created this way is labile -- here one day, gone the next. Tastes, technology and conditions are in constant flux; the success of offerings in the market depends on constant satisfaction of what the consumer wants. Sears is replaced by Wal-Mart. IBM nearly dies until it reinvents itself. The examples are everyday and endless. Joseph Schumpeter called this “creative destruction” and the driving forces are innovation and competition.

Some regulation aids competition, wealth creation, and the process of market change. Drive on the right. Stop for stop signs. Disclose truthfully what’s inside the package. Don't lie about what you sell. Use uniform weights and measures so people can compare among goods and services and trade easily.

Other regulations hinder and impede competition, wealth creation and change. You can not offer a good or service until some agency says so. You cannot charge the price that people are willing to pay, but only one a bureaucrat deems “fair”. No alternative route or method of transport which potential competitors dislike will be allowed until approved. These types of regulation, all of which we have on the books, stifle innovation and competition, and reduce incomes. They freeze the market, to what is already there, and the options consumers can choose to those that exist. Economic regulation of this sort creates pockets of privilege, where entrenched business and labor shelter behind legal protections. They slow growth and thus create relative impoverishment – people are less well off than they otherwise would be.

There are always reasons given for this blockage of change and preservation of privilege, and they are usually plausible until examined. This process takes time. Everyone thinks the SEC's elaborate, mystifying, and costly review of new issues is a great boon for investors, but Nobel-prize winner George Stigler, in a famous study, demonstrated that no net benefit arises. (TBC at 198-200). The review of new drugs by the Food and Drug Administration, also thought to keep us protected from charlatans and frauds, has denied or delayed beneficial treatments by lengthy and hyper-expensive review, not just of safety but also of efficacy over existing drugs. This harms many, restricts competition, and choice. (TBC at 200, 236 at 223). Similar examples abound. TBC at 192-201.

Wealth obtained through the private market comes by satisfying people's wants and needs, by delivering desired services or products at a price they can afford. The wealth and advantages which markets bring pass with underlying shifts in conditions or sentiment – which may occur overnight. What happened to Digital Equipment Corp, a leading computer manufacturer? Apple nearly failed selling desktop computers until Steve Jobs was asked back and as if by magic in a short few years everyone was carrying computers in their pocket and Apple became the most valuable company on the planet.

By contrast, the advantages (economic privileges) intrusive regulation creates for those able to take advantage are long lasting and hard to change. (TBC at 167). Concentrated voices and money resisting change create political imbalance perpetuating the status quo as the few with much at stake continue to benefit at the expense of the many whose interest is too small for them to care.

This fact led F. A. Hayek (The Road to Serfdom, at 210) to conclude:

“Let a uniform minimum be secured to everybody by all means; but let us admit at the same time that with this assurance of a basic minimum all claims for a privileged security of particular classes must lapse, that all excuses disappear for allowing groups to exclude newcomers from sharing their relative prosperity in order to maintain a special standard of their own.”

This makes sense. Provide for the needy, but not so as to keep them dependent on government largesse or rob them of motivation to succeed. Avoid intrusive economic regulation, promoted with false beliefs in equality, but which robs everyone of the benefits of open markets, and affords a privileged few unjust advantages.

A truly progressive view is based on individual freedom, opportunity for all, and the removal of regulatory privilege and the deadening burdens and costs of unnecessary bureaucratic morass. It is time to shed rigid adherence to failed formulas for government control, fostered by well-meaning ideals but which instead impose far worse harms on those least able to protect themselves, in lost job opportunities, slow growth, and the initiative-crushing, dead hand of the regulatory state.

For a further, more detailed discussion of what makes for harmful and what makes for helpful types of regulation, see TBC at 218-223.